1. Field of the Invention
The present invention relates to a method and system for administering a variable annuity; and more particularly, to a data processing method for administering a deferred variable annuity contract during the accumulation phase, the annuity contract having a payment base value, a contract value, and a step-up provision with a guaranteed step-up.
2. Description of the Prior Art
An immediate annuity is typically used to provide an income stream within a predetermined length of time from the date the premium is received. The amount of income can be either fixed or variable in nature and typically these products do not provide an account value. A deferred annuity is typically used to provide accumulation and, potentially, a future stream of annuity income. The deferred annuity comprises an accumulation period during which the account value will vary with the underlying investments and an annuitization period where the client purchases an immediate annuity with the account value available. Deferred and immediate annuities typically provide guaranteed income for life which transfers some portion or all of the risk of outliving one's accumulated assets to the insurer. One basis for distinguishing commonly available deferred annuities is whether the annuity is classified as a “fixed annuity” or a “variable annuity”.
In a fixed annuity, the insurer guarantees a fixed rate of interest applicable to each annuity deposit. Therefore, a fixed annuity is desirable for those seeking a “safe” investment. The guaranteed-interest rate may apply for a specified period of time, often one year or more. Often, a rate guaranteed for more than one year is called a “multi-year guarantee”. The rate credited on a fixed annuity is reset periodically, moving in an amount and a direction that correlate the yields available on fixed-income investments available to the insurer.
With a variable annuity, the annuity contract owner bears the investment risk. The relevant life typically has a choice of funds in which he/she can direct where the annuity deposits will be invested. The various funds or sub-accounts may include stocks, bonds, money market instruments, mutual funds, and the like.
Variable annuity contracts typically provide a death benefit. Oftentimes during the accumulation period this death benefit is related to the contract value. That is, if the sub-accounts backing the contract value have performed poorly, then the death benefit may be reduced to an insignificant amount. After annuitization, the death benefit can be a function of the remaining payments of the annuity at the time of the relevant life's death. Further, if the annuity contract does not provide a guarantee (discussed below), the contract will terminate when the contract value goes to zero or some other amount specified in the contract or rider.
Annuity contracts may also provide guarantees in several different variations. A Guaranteed Minimum Death Benefit (GMDB) is a guarantee that provides a minimum benefit at the death of the relevant life regardless of the performance of the underlying investments. A Guaranteed Minimum Income Benefit (GMIB) is a guarantee that will provide a specified income amount at the time the contract is annuitized. The income payment will be dependent on previously stated details set out in the contract. A Guaranteed Minimum Accumulation Benefit (GMAB) is a benefit that guarantees a specified contract value at a certain date in the future, even if actual investment performance of the contract is less than the guaranteed amount. A Guaranteed Minimum Withdrawal Benefit (GMWB) is a guarantee of income for a specified period of time, and in some versions, the income stream is guaranteed for life without requiring annuitization as in the guaranteed minimum income benefit. However, this guarantee will automatically annuitize the contract if the contract value is reduced to zero or some other amount specified in the contract or rider.
Most deferred variable annuity products have a payment base and a contract value. The payment base is typically a function of the previous premium payments and withdrawals by the relevant life, and the value of the payment base does not vary with the underlying investments. Unlike the payment base, the contract value of a deferred variable annuity product varies with the performance of the underlying investments. Several prior art variable annuity products provide for an increase (also known as a “step-up”) in the value of the payment base if the contract value increases because of favorable performance of the underlying investments. However, most of these prior art step-up plans require that assets be reallocated according to the step-up. Therefore, the providers of many prior art variable annuity products manage the risk associated with the step-up provisions by controlling the asset allocation of the core investments of the annuity. The relevant life is limited to a specific asset allocation in order to qualify for the step-up provisions. Furthermore, these prior art step-up plans do not allow for the possibility of a step-up in flat or down markets.
Many financial products have been disclosed. These include: a financial instrument providing a guaranteed growth rate and a guarantee of lifetime payments, providing flexible income, liquidity options and permanent legacy benefits for annuities, and mortality and expense risk charges with premium-based breakpoints in annuity products. These all contain at least one of the following disadvantages: the plans do not relate to stepping-up the payment base of an annuity contract in response to growth of the contract value; the step-up plan requires a specific asset allocation in order to qualify; the step-up plan does not allow for a step-up to the payment base in flat or down markets; and the step-up of the step-up plan is not guaranteed at a predetermined percentage.
Accordingly, there remains a need in the art for a data processing method for administering a variable annuity contract wherein the annuity contract has a payment base step-up provision and wherein the only restriction on the step-up provision is that the step-up is guaranteed at a predetermined percentage.